Productive Pipeline Positions BioMarin for Success

BioMarin’s life-saving therapies may serve only a few thousand patients globally, but with six-figure price tags on most products and high barriers to entry, we see this as a very attractive marketplace. Genzyme and BioMarin formed a 50/50 joint venture to market BioMarin’s first drug, Aldurazyme, for the treatment of mucopolysaccharidosis I, or MPS I. BioMarin’s MPS VI drug, Naglazyme, is maturing but still seeing solid growth due to use in emerging markets like Brazil and higher (more expensive) dosing as young patients mature; we think peak sales will surpass $400 million. BioMarin is also well positioned to treat the entire spectrum of patients with phenylketonuria, or PKU, one of the world’s most common metabolic disorders. Kuvan is approved to treat mild to moderate PKU, and more potent drug pegvaliase should reach the market in 2018 to serve adult patients with PKU. PKU is well diagnosed thanks to state-mandated newborn screening programs, and no alternative drug therapies exist.

While drisapersen has failed in Duchenne muscular dystrophy, BioMarin is amid a strong Vimizim launch in Morquio A syndrome, and the launches of Brineura (2017) and pegvaliase (2018) should also drive growth. We are the most aggressive on our assumptions for vosoritide, which has shown the ability to restore normal growth rates in young patients with the most common form of dwarfism, and we think the drug could launch in 2020.

Orphan Drug Focus Has Competitive Advantages We think BioMarin's lucrative monopolies in several rare-disease niches have provided it with enough competitive advantages to warrant a narrow economic moat. BioMarin operates in the market for ultra-orphan disease treatments and already sees substantial sales from three marketed products. Aldurazyme, BioMarin's first product, was approved in 2003. Only 3,000 people in the developed world are afflicted with the life-threatening disease MPS I, but Aldurazyme's $200,000 price tag and market monopoly (thanks to orphan drug exclusivity, process patents through 2020, and difficult manufacturing) have made it a $200 million product. For Naglazyme, approved in 2005, BioMarin has patent protection until at least 2022. We think Naglazyme will grow from a $300 million product to a $400 million one in the long run, and BioMarin retains global rights to this product. While the status of BioMarin's third product, Kuvan, as a small molecule and the expiration of U.S. orphan drug exclusivity in 2015 could make it more vulnerable to generic competition, we think peak sales (now including Merck KGaA's international rights) will surpass $500 million in 2020. The recently approved Vimizim, the most important product in the company's portfolio, has patent protection through 2029 in the United States and 2024 in Europe.

We think BioMarin’s moat extends well beyond patents. Enzymes to treat rare genetic diseases--including Aldurazyme, Naglazyme, and Vimizim--are quite difficult to manufacture reliably, as Genzyme showed with its viral contamination issues in 2009. This, coupled with the fact that BioMarin’s drugs hover well below blockbuster status, could make them less profitable targets for generics companies, once the costs of manufacturing, clinical trials, and global marketing are tallied. In other words, we think ultra-rare forms of skeletal dysplasia and rare metabolic disorders are markets that are most effectively served by one company, so efficient scale serves as another source of BioMarin’s narrow moat. BioMarin’s products qualify for several years of market exclusivity, based on their orphan drug status.

We think BioMarin’s moat trend is positive, thanks to our expectations for strong, sustainable growth for marketed products and a late-stage pipeline that should add to BioMarin’s already established intangible assets (such as patents and manufacturing know-how) in the field of orphan diseases. Vimizim was recently approved in the U.S. and Europe, and with approximately 2,000 patients already identified globally, we expect sales to peak above $800 million, ahead of Aldurazyme, Naglazyme, and Kuvan. While this could make Vimizim a more interesting target for competitors, we think BioMarin’s market monopoly in MPS IVA should continue to be protected by patents (through 2029) as well as efficient scale (a market best served by one company). BioMarin’s pipeline also looks full. BioMarin recently reported positive phase 2 data for achondroplasia drug vosoritide and started phase 3 trials in December 2016. Positive data for Brineura (cerliponase alfa) supported approval in 2017. Solid late-stage data for severe PKU drug pegvaliase should allow approval in 2018. BioMarin’s clinical pipeline also holds the leading hemophilia A gene therapy and a treatment for Sanfilippo B syndrome; both could reach the market early in the next decade.

BioMarin’s profitability has been held back by expensive efforts to expand this small company’s global reach as well as pursue clinical trials to boost the uptake of Kuvan and test additional drug candidates like Vimizim. We see sustainable profitability ahead as revenue growth from its products accelerates and incremental costs stabilize.

R&D Outlays Have Delayed Profits Although it has several approved products in its portfolio, high research and development expenses have prevented BioMarin from turning a significant profit. Given the substantial investment that goes into developing, manufacturing, and marketing biological drugs, it is critical that BioMarin penetrates a high portion of the extremely small markets that it serves. BioMarin could struggle to bring new PKU patients onto Kuvan therapy, and the future approval of pegvaliase as a treatment for more severe PKU patients could slow Kuvan's growth trajectory.

Acquired pipeline programs haven’t yet established a strong record for success. The 2009 agreement with La Jolla Pharmaceutical for lupus drug Riquent was a failure, and BioMarin’s drisapersen (acquired with Prosensa in 2015) has failed to reach the market (research on next-generation versions of drisapersen is very early and high risk). BioMarin’s Pompe disease drug reveglucosidase alfa could have difficulty competing with Sanofi’s established treatments Myozyme/Lumizyme and a next-generation therapy already in phase 3 testing, and BioMarin’s decision to out-license the product supports this view.

BioMarin ended 2017 with $1.8 billion in cash, cash equivalents, and investments after a roughly $500 million convertible note offering in 2017. BioMarin has plenty of cash on hand to pay down convertible debt as it comes due in 2018 ($375 million) and 2020 ($375 million). In addition, we expect BioMarin to generate profits from 2017 on, and our current free cash flow estimates suggest that the company will not need external financing to fund its operations going forward.